Why simple incentives are the key to dynamic energy efficiency

What do you think about when you consider extreme energy efficiency? Perhaps you think about gigantic solar arrays, intricate water reclamation technology, or slick computerized building controls.

While all those measures are well and good, you don’t have to buy fancy equipment or use luxury materials to achieve superior energy savings.

When it comes to lowering energy consumption, I believe that simple utility incentives—which are often just a few lines of text—may very well be our most powerful tool.

Explaining incentives

As McKinstry’s Director of Engineering, I find myself immersed in the ecosystem of energy codes, utility programs and efficiency incentives. My team is constantly working within this ecosystem to make sure our clients are realizing maximum energy savings.

Utility incentives are often designed to help pay down the “first cost” of an energy-saving capital upgrade. They do this by offering a rebate for savings that the building owner captures over the life of the equipment.

Unfortunately, these incentives are structured to encourage prescriptive “equipment-based” thinking rather than holistic or “systems-based” thinking. As Ash Awad, McKinstry’s Chief Market Officer, puts it, “You can get an incentive to change your lights, but not to turn them off.”

Another issue with our current utility incentives is that they’re inflexibly tied to the energy code. Currently, substantial renovations to existing buildings often trigger an obligation for building owners to meet energy code levels of performance.

This is informally referred to as the “frozen in place” problem, because a utility policy that uses the code baseline to determine project incentives effectively removes the fiscal incentive to undergo a project at all. It’s often cheaper to stand pat and, as a result, buildings remain “frozen in place.”

How can we offer an alternative to these well-intentioned but sometimes suboptimal utility incentives?

Performance-based options

At McKinstry, we support the concept of a meter-based or performance-based approach to utility incentives. Instead of using the energy code, this approach uses measured building performance (as reflected by the readout from the water or electric meter) as the baseline for paying incentives.

It also spreads the risk of energy efficiency savings realization and persistence more equitably between utilities and customers. Current practice has the utility taking on 100 percent of the risk by paying their incentives up front.

Meter-based savings put some of that risk on customers and service providers like McKinstry, but—in return—customers get a long-term annual revenue stream from the utility that pays for savings as they occur.

Performance-based incentives pay for actual, realized savings instead of paying for unreliable, predicted savings. For every energy-saving tactic implemented, building owners (or tenants, depending on lease arrangements) save twice: once through reduced energy and again by an incentive payment from their utility company.

The proof is in the pudding

For several years, McKinstry has been proving that meter-based incentives work in the real world, not just in theory.

McKinstry was early to the table with Seattle City Light to test the concept with our client One Union Square. This client is a commercial office building in downtown Seattle that—prior to our project—had an 89 ENERGY STAR rating.

While, by all measures, this was a very efficient building, we decided to test that assumption. What we found was that by deflecting the focus from altering what was put in (prescriptive, equipment-based technologies), to holistically improving how the building operated resulted in a 20 percent reduction in energy consumption. That reduction was incentivized and rewarded by performance-based incentives.

This was made possible by a pilot program sponsored through Seattle City Light, but the Energy Trust of Oregon has also run a successful pilot program testing this meter-based approach. Encouragingly, both organizations are scaling up their pilot programs this year.

How to make it happen

While most utilities are still using the old energy code-based incentive system, it’s important to realize that offering a performance-based system wouldn’t require these utilities to abandon their current approach.

Such a shift would simply add an optional compliance path for customers who see an advantage in pursuing a meter-based approach. The approach would have to prove its value, and we’re confident that it has and will continue to do that.

We’re excited to see how the future of utility incentives will unfold. It’s just a few lines of text, but the right policy can spark creative problem-solving and unlock the potential for dynamic energy savings.

Comments

How much? That is the piece of the puzzle that has been missing. How are incentives figured and paid? Different amounts for different times? Once the market begins to understand that, it will either act or decide it isn’t worth it. Can you fill in that hole?